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There is no shortage of tenants and investors lining up to grab a piece of Queen St, despite the upheaval being caused by the upgrading of the Auckland CBD's main street.
James Chan, one of Bayleys Real Estate's leading commercial brokers, has sold four retail outlets for more than $13 million while the street works have been going on.
These include the All Black Shop and the Open Cafe outlet in the Dilworth Building, the Louis Vuitton shop at 99a Queen St and a unit at 155 Queen St, anchored by a Caltex Starmart.
Chan says while the upgrading work is creating short-term disruption, it is likely to produce long-term gains for investors, with the council investing a substantial amount of capital in the street.
He also predicts there will be considerable competition and jockeying for position among tenants in the lead-up to the 2011 Rugby World Cup, with a number of international retailers likely to announce their arrival in New Zealand by taking a tenancy in Queen St.
While the strata titling of some buildings in the CBD has provided more opportunities for small-to-medium sized investors, Chan says property in Queen St is still very tightly held and it is unusual for four retail properties to come up for sale within such a short time.
The sales have been made on behalf of Asian owners to local Asian investors, well known for their fondness for retail property. Chan said in some cases the overseas vendors had owned the properties for up to 10 years and were looking to cash in on a currency gain as well as the strength of the market.
The All Black Shop, located on the ground floor in the Dilworth Building in a prime position on the corner of Queen St and Custom St, sold for $4.4 million at a 6.3 per cent yield.
Chan says the annual rental of $276,000 is below an assessed market rental value for the 209sq m premises but takes into account the fact that the tenant has spent a substantial amount renovating the premises. RESport has a five-year lease from October 2005.
Chan has also sold a smaller 149sq m cafe in the Dilworth Building for $1.25 million at a 5.8 per cent yield. The Open Cafe has exercised its first and only three year right of renewal on the lease which runs until March 2009.
Further up Queen St, Chan, in collaboration with Lyle Flood of Bayleys Takapuna, also negotiated the sale of the 259sq m Louis Vuitton outlet for $4 million at a 6.4 per cent yield. Louis Vuitton has a two-year lease running from November 2005.
Chan and Flood also sold a unit of close to 450sq m containing three tenancies on the ground floor of an office building, on the corner of Queen St and Wyndham St, also for close to $4 million.
The main street front tenancy is a Starmart convenience store, with a lease to Caltex NZ until 2010. Moneyworld Asia (NZ) has a lease on the rear part of the unit until 2012.
Esquires Cafe is the other tenant, occupying one of the smallest retail outlets in the CBD at just on nine square metres. It has a six-year lease from December 2006 on space that formerly housed an A" machine but is now used as a takeaway coffee kiosk.
The property was sold at a 7.5 per cent yield. Chan says the higher yield reflects the additional management expense involved with its multi-tenancies and the fact that it has an office component to it.
Queen St has now supplanted Wellington's Lambton Quay as the most highly valued retail strip in the country, according to a Bayleys Research overview of the retail market.
It says the highest rental rates are being achieved in lower Queen St from Victoria St to Customs St, with retailers such as Mount Blanc and Canterbury paying premiums of around $2500 per square metre.
Some tenants of smaller amounts of space are paying even higher rents. Chan says the Esquires Cafe lease of nine sq m is close to $4000 per sq m but this is exceptional.
A survey of prime strip retail rates around the world by Bayleys international affiliate Cushman & Wakefield shows that New Zealand ranks 32nd most expensive out of 47 countries. In New York's 5th Avenue, home to retailers like Cartier, Tiffanys and Saks, occupants are paying 10 times Queen St rents, at close to $23,000 per sq m. Hong Kong's Causeway Bay is not far behind at just over $19,000 a square metre while Sydney has the most expensive space in Australasia at $6650 per square metre.
Chan says the survey shows that New Zealand rental rates are relatively inexpensive in an international context.
Queen St retail rentals have shown good increases over the years and that looks set to continue. It is much less volatile than some international markets.
Chan does not believe there is any room for further downward movement in yields in the current higher interest rate environment. He says in a more uncertain economic environment, it is only prime strip retail space, such as Queen St or Broadway in Newmarket or buildings occupied by blue chip tenants like banks, that are likely to continue to achieve sub 7 per cent yields. There is already evidence that yields are starting to soften on some properties that don't fall within this category.
Chan, who is fluent in Mandarin, Cantonese and English, joined Bayleys in the late 1980s as an interpreter before moving into commercial brokerage.